Two semiconductor funds aren't enough to satiate chip-starved investors.
column on chips funds mentioned two noteworthy portfolios with sizeable semiconductor positions: the
Fidelity Select Electronics fund and the
Firsthand Technology Value fund. Like the semiconductor stocks they both own, these funds will swing wildly, but both carry remarkable track records.
With the dramatic surge in semiconductor stocks this year and many chip companies reporting better-than-expected quarterly earnings, I've been hearing from readers who want to know how to own these stocks through a mutual fund. Since Friday's nasty decline, the
Philadelphia Stock Exchange Semiconductor
index came roaring back on Monday and Tuesday, climbing 18% for the two days combined, and the index is up 49.4% this year. Meanwhile, investors have written in suggesting other ways to get in on the action.
"You missed one of the pure-play chip funds,
Rydex Electronics fund," writes
. "Firsthand Tech Value owns a lot of other plays besides chips and even has medical tech stocks, so it isn't a chip fund at all."
True, Rick, the Rydex sector fund is more of a pure semiconductor fund than the Firsthand fund, but its record is significantly shorter.
Rydex Electronics has been around for two years, while the Firsthand fund has been open for almost six. For the past year, Rydex Electronics is up 160%, ranking it ahead of 97% of the tech funds tracked by
. That one-year return lands it squarely between the Fidelity fund, at 139%, and Firsthand's 190% return.
The Rydex fund has about 51% of its assets in chip stocks, says Dan Gillespie, senior portfolio manager of the Rydex sector funds.
Rydex managers use a quantitative approach to pick stocks, a process that involves using complex mathematical computer models to determine which stocks to buy and sell. They screen companies for sales, assets and earnings to come up with a universe of stocks and then rank them according to market capitalization. The stocks are then screened for liquidity and how easily they can be traded.
Not surprisingly, the biggest positions in the fund are in some of the heavyweights of the industry:
make up more than 22% of the $275 million fund.
The fund isn't quite a pure chip play. It also owns some telecom equipment companies that produce chips, like
, as well as some nonchip stocks like
, a maker of disk and tape drives for computers.
also insists I overlooked a well-known investor who is an unlikely chip lover.
"I think you missed my personal favorite fund manager Martin Whitman and his
Third Avenue Value fund," Komodore writes. "I believe you should have included his fund. His top picks like
Silicon Valley Group
aren't big names but are carefully chosen semiconductor issues."
Whitman's familiar value fund is indeed heavy in semiconductor-equipment stocks -- the companies that make the equipment used by chipmakers to manufacture their products. At the end of March, the $1.6 billion fund had about 29% of its assets in chip-equipment stocks. Now that percentage stands at around 33%, says Whitman.
The fund has been adding names like Silicon Valley Group and FSI last week and this week, he says. Silicon Valley Group produces wafer-processing equipment for companies like Intel. FSI makes systems that process light-sensitive materials used to etch patterns on chip wafers.
The fact that a deep-value investor like Whitman owns these stocks at all is a testament to their volatility. These stocks have been known to fall and fall hard.
Whitman started buying these stocks when they were in a deep depression about three years ago. "We were buying them at maybe seven to 10 times peak earnings," says Whitman. "We did 12 of them, and about the same number is in there now."
These stocks have seen great gains this year with the overall surge in chip stocks.
"We may look like heroes but the business isn't that easy," says Whitman. "I was nervous about all semiconductor companies except Intel. The cycles I could live through. I know we were buying in the middle of depression." It's the extreme competition in the business that scares Whitman. "For better or worse, the industry is too dynamic and you're going to have a fair amount of losers." Whitman bought so many in the first place because he can't completely predict which ones will survive.
When will he sell them? "Hopefully never. We're buy-and-hold guys," he says. Indeed, the fund's annual turnover is a miniscule 5%.
"Because of new innovations it now looks very much like the current cycle is going to last three to five years." Whitman believes the chip companies are re-equipping to go to bigger, faster chips, which means they must buy more equipment to upgrade their facilities.
Continued success in these stocks would certainly help Whitman's value fund. Value investing has been comatose for the past few years, which shows in Whitman's returns. The fund's three-year annualized return of 17.7% trails the
-- a large-cap growth index -- by more than seven percentage points, according to Morningstar. However, it beats 92% of its small-value peers.
With this fund, you will get more than just chip stocks, of course. Third Avenue Value had 12.7% of its assets in Japanese blue-chips at the end of March. Two of the fund's top holdings are
Financial Security Assurance Holdings
, an insurance company, and Japanese insurer
Tokio Marine & Fire
This year, the fund's up 15.7%, ahead of the S&P 500, the
. Let's hope Whitman's chips can keep it up.
A Love Letter
was dismayed to see David Tice,
Prudent Bear fund manager, quoted in Tuesday's
column on funds that short stocks.
"I'm surprised you even give Tice space in your column given the record of his fund. Wow! Talk about dismal!" ways Weinrich. "Why does the media dig up his name whenever the market makes a downward move? This guy is wrong so much that (Wrong Way) Corrigan looks like a pathfinder."
Douglas "Wrong Way" Corrigan was the pilot in the late 1930s who took off in a plane headed for California and landed in Ireland.
Funny, but not altogether fair.
Tice is a self-professed bear. He makes no bones about that. His fund has the word bear in its name. At least investors know exactly where he stands. And with this rocky market, some people do want to hear what guys like Tice have to say.
Send your questions and comments to
firstname.lastname@example.org, and please include your full name.
Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.